Unlike cryptocurrencies such as Bitcoin and Ether, digital assets with fixed price that are backed by a reserve asset are called stablecoins. Stablecoins facilitate trading by offering price stability in the cryptocurrency market known for its high volatility.
While the high volatility of cryptocurrencies is a feature that attracts investors, it makes their usability difficult. For this reason, cryptocurrencies, which are generally used as a value storage tool, are not preferred for payments. Stablecoins, on the other hand, establish a bridge between the digital money world and fiat money, making it easier for crypto money holders to transact
What types of stablecoins are available?
There are three types of stablecoins that differ in the asset they are fixed to:
Fiat-backed stablecoins: Reserve assets are stablecoins, a fiat currency like a dollar. Their prices are fixed to the currency in which they are supported. Stablecoin issuers have to store the money worth of the coins they create in their reserves.
The reserves of the companies are regularly audited by the authorities of the country in which they are located. Tether, the stablecoin company, which was found to have insufficient funds in its reserves, had to pay a fine of $ 18.5 million in a lawsuit filed by the New York Attorney General’s Office.
While there are examples of stablecoins backed by commodities such as gold, silver and oil, most stablecoins use dollars as reserve assets.
Crypto-backed stablecoins: Stablecoins can use fiat currencies as well as another cryptocurrency as a reserve. Due to the high volatility of cryptocurrencies, high collateral is used for these stablecoins. Stablecoin issuers try to mitigate the impact of the volatility by keeping much more cryptocurrencies in their reserves than the value of the stablecoins they generate.
Algorithmic stablecoins: They are stablecoins that are not backed by any fiat currency or crypto. Algorithmic stablecoins use algorithms and smart contracts that control the token supply instead of the reserve asset. These mechanisms, whose functions are similar to central banks, try to maintain price stability by reducing supply if the stablecoin price falls below the price of the currency in which it is fixed.
What are the usage areas of Stablecoins?
The biggest feature that distinguishes Stablecoins from other crypto currencies is that they have a fixed value. As a safe haven for investors, stablecoins allow to hold value without worrying about price fluctuations.
In addition, many cryptocurrency exchanges use stablecoins as the base currency in the pairs they offer trading opportunities. This is why investors buy and sell crypto, often using stablecoins.
Stablecoins can also be used in money transfers with a much lower transaction fee compared to traditional methods such as SWIFT. Stablecoins, which can be used in international payments without any problems, also shorten the completion time of traditional methods.
There is also an increase in the use of Stablecoins in payments. Many payment networks have started supporting stablecoin payments. Finally, Visa announced to sellers that they will support transferring payments as stablecoin USD Coin (USDC).
Stablecoins can also find use in decentralized applications and salary payments.
What are the most commonly used stablecoins?
As of March 2021, there are four stablecoins among the top 50 cryptocurrencies by market capitalization. These are Tether, USD Coin, Binance USD and Dai.
Tether (USDT): USDT, issued by the Hong Kong-based company Tether, is fixed in dollars at a one-to-one rate. USDT, the most widely used stablecoin in the crypto industry, is the fourth largest cryptocurrency and the largest stablecoin with a market capitalization of $ 40.7 billion.
USD Coin (USDC): Launched by the Center Consortium, founded by Circle and Coinbase, USDC is fixed at a one-to-one rate. It is the 12th largest cryptocurrency and the second largest stablecoin with a market cap of $ 10.6 billion.
Binance USD (BUSD): Created by Binance, the world’s largest cryptocurrency exchange, BUSD is fixed in dollars at a one-to-one rate and is overseen by the New York State Financial Services Department. With a market value of $ 3.6 billion, BUSD is the 34th largest cryptocurrency.
Dai (DAI): Launched by MakerDAO, the Ethereum-based stablecoin DAI is dollar-indexed at a one-to-one ratio. DAI is the 39th largest cryptocurrency with a market capitalization of $ 3.02 billion.